Luxury Brand Marketing and Starbucks - Case Study Example

Luxury brand marketing and Starbucks Introduction The luxury goods market has typically experienced global growth rates of seven percent on an annual basis (AMCHAN, 2007). A seven percent growth rate in luxury brands is much higher than the growth rate for many non-luxury products, making this market attractive to companies looking to expand their luxury products globally. It has been offered that luxury brands tend to remain stronger during times of economic hardship than other luxury brands, however there is evidence that increased global competition in luxury brands as well as more price-conscious luxury consumers are making luxury brands suffer in today’s recessionary environment across the world. This impacts companies like Starbucks, the global coffee house, which has typically positioned its products as luxury goods and had, up until 2007, experienced explosive growth rates and same-store sales increases. After 2007, however, Starbucks began to experience noticeable drops in consumer patronage and was witnessing sales declines in same-store revenues. Much of this problem can be attributed to poor marketing strategy, an over-reliance on rapid global expansion, and changing consumer behaviour patterns around the globe. This report discusses the difficulties of marketing luxury brands in today’s economy, along with an in-depth analysis of the condition of Starbucks in 2007 and their current attempts to re-invigorate the brand to emerge a success in the face of challenging economic conditions at the domestic and international level. Marketing luxury brands “As luxury brands have adopted mass-market brand models, so have mass market brands started to mould themselves into incarnations of luxury goods” (Rieke, 2009, p.2). Even though analysts and marketing experts believe that luxury goods tend to emerge more successful during times of economic difficulty, luxury brands are experiencing noticeable declines with the growth of international competition. Non-luxury products, in an effort to remain competitive, are repositioning their products to appear luxury, therefore appealing to mass market audiences and not necessarily the elite and upscale buyers. Using clever and innovative advertising and similar promotion, companies are able to send the consumer perception that their non-luxury goods actually fit in a luxury category, therefore making them more appealing. When luxury markets are saturated with clever non-luxury product promotions, the effectiveness of their brand strategy toward luxury consumption is minimised and marketers must reinvigorate their luxury product status. For example, some luxury brands, realising this new reality in competition, have adopted “alternative marketing strategies, including exhibitions, events, and sponsorship to be more effective in educating the market and reinforcing certain values, such as status, heritage, and exclusivity” (China Daily, 2009, p.2). In previous years, when global economic strength was significant and luxury brands were experiencing high sales volume and growth, basic competitive positioning tactics were used among rival luxury brands in order to differentiate the product. However, with non-luxury brands attempting to categorise their products as luxury in this marketplace, the need to explore more costly and time-invested marketing activities such as sponsorship and exhibitions becomes a competitive reality. Luxury brands, such as Starbucks, being forced to come up with new marketing practices such as the exhibition, clearly illustrate that the competitive market for luxury goods demands new marketing models in order to increase brand awareness and to differentiate from both luxury and non-luxury products. At a time when the global economy is less-than-favourable for growth in luxury brand status, price-conscious consumers might be lured toward the non-luxury product, which has been positioned for competition in the luxury market, based on price. The difficulty for some luxury brands, such as Starbucks which boasts over 87,000 different beverage combinations (Harford, 2009), is estimating the product life cycle from the product’s initial launch until consumers ultimately reject these products in favour of competing luxury brands. For example, in the UK, over 10 million cups of coffee are sold each day, with 500,000 of these drinks flavoured with syrup shots (Bintliff, 2009, p.21). The latte coffee is the most consumer-favoured drink available at Starbucks and other companies, even ahead of cappuccino products (Bintliff). Even with the most advanced consumer research, there is no definitive method of determining whether latte drinks, as one example, will continue to be an international favourite for a life cycle of more than five years. Changes at the social level, or the growth of other luxury coffee houses offering better prices and more flexible beverage combinations, could drive Starbucks latte sales downward. Starbucks, as a luxury brand, is basically forced to make educated guesses based on research when deciding the expected life cycle of its products. This makes the process of marketing and promoting each individual luxury product in Starbucks’ broad product options significantly difficult and, perhaps, ineffective when changing consumer behaviours abruptly shorten a product’s life cycle when they no longer favour the product. Luxury brands are certainly not immune to changes in consumer behaviour or the competitive promotional activities of non-luxury brands which work toward seizing market share from luxury product marketers. For example, in late 2007, McDonald’s launched its own premium coffee line, using promotion to make this non-luxury product appear top quality and able to compete with different higher-priced coffee houses. The company even used the grande and venti sizes which are common drink sizes well known at Starbucks in their effort to compete for the luxury beverage consumer market (Adamy, 2008). This new competitive push by McDonald’s to seize Starbucks’ market share is one solid example of how non-luxury brands have been able to cause luxury brands to feel the effects of lost market share. Starbucks’ plight in 2007 The year 2007 was a very difficult year for Starbucks at both the profit level and at the strategy level when deciding on what marketing strategy would be most effective for strengthening this luxury brand. In the last two quarters of 2007, Starbucks experienced a 50 percent decline in share price and some of the brand’s first decreases in customer visits (Herriman, Wanikawa, Ichinose, Darak and Chaivan, 2008). By the time the first part of 2008 arrived, Starbucks had experienced drops in same-store sales across the world, forcing the closing of, literally, hundreds of stores in different market territories (Herriman et al). The pricing model which had driven Starbucks’ successes had always been established at the luxury level, justifying higher prices for the company’s many products based on reputation and the company’s ability to use promotion to emphasise quality and exclusivity. Price competition, until 2007, had never been much of an issue for Starbucks and they had always managed to experience high consumer following even with higher than industry-average pricing models. “Price competition (does) too much damage to the business. Customers wanting a gourmet drink may be turned off by a store with lower prices simply because of the lower prices” (Aronin, Fetterman, Liu and Peng, 2004, p.3). Starbucks ran the risk of essentially cheapening their brand image if reduced product pricing were to be considered. As a luxury brand attempting to stay strong in a period of economic decline, Starbucks had to consider alternative options other than changing pricing models to reflect reduced pricing at the risk of giving consumers the impression that the company’s quality and exclusivity had taken a decline. Changes to consumer behaviour and their cultural beliefs on healthier eating and calorie reduction also drove some of the declines in sales at Starbucks in 2007. For example, a Grande White Chocolate Mocha at Starbucks contains 510 calories and a considerable amount of saturated fat (Berman, 2006). Dietary changes in consumers shifting toward healthier foods consumption even impacted the profit models of some companies like McDonald’s, who invested more than 2 million USD into promotion to show its efforts to reduce saturated fats and clearly label calorie content on its packaging. Even though McDonald’s is not a luxury brand, shifting consumer behaviour regarding healthy consumption seems to have contributed to Starbucks’ sales growth problems in 2007. In the latter part of 2004, Starbucks developed what was known as its Coffee Master programme which involved a “cupping ceremony” where tasting rituals were performed by internal staff members and consumers (Helm, 2007). This Coffee Master programme was an attempt to make a visit to Starbucks much like a wine tasting event, therefore reinforcing the luxury status of the Starbucks brand. This was a long-term promotional strategy, expected to have a considerable life cycle based on the consumer beliefs on coffee consumption at the time. It also helped to justify the higher prices attached to its premium bean products by linking upscale lifestyle with product promotion. However, by 2007, consumers did not favour the Coffee Master programme and this strategy to differentiate the business and justify high prices was essentially abandoned. In this situation, Starbucks did not have enough advanced warning, either through inappropriate research or just unexpected changes in buyer behaviour, to realise that this strategy would not, long-term, reinforce higher sales growth by appealing to what consumers genuinely prefer in coffee consumption experiences. Additionally, internal improvements were being developed in order to shorten the time it took for consumers to receive their beverages, such as the implementation of the Verismo 801 automated espresso machines (Buchanan and Simmons, 2009, p.11). However, this internal improvement took away from the more aesthetic pleasures which consumers had grown reliant upon in previous years, such as being able to view the coffee brewing process. Heavy investment into new processes and new technologies, at the strategy level, took away from the sensory experience of consuming this luxury brand, likely contributing to some sales declines after 2006. Further, as a matter of cost savings, the lush and posh décor normally found at Starbucks had been replaced with fewer cosy and contemporary seating options (Buchanan and Simmons, p.12). This cost-savings effort, again, took away from the aesthetics of consuming Starbucks’ products in-house, making them less attractive at the comfort and potential social level, unlike previous years where décor was recognised as part of the Starbucks brand experience. With declining sales, changing consumer behaviours in terms of luxury products and healthy consumption, store design and concept changes, and growth in other coffee houses, by the end of 2007, Starbucks essentially realised that it could no longer rely on same-store growth and was forced to cease expansion efforts which had, previously, driven measurable sales success and the ability to satisfy mass market and luxury consumers alike. Re-invigorating Starbucks By January 2008, after Howard Schultz returned as the company’s CEO, the business was forced to further cut costs due to the poor marketing conducted in 2007, including “closing stores, renegotiating rents and reducing the number of bakery suppliers” (Jargon, 2009, p.B5). This change in leadership, by regaining Howard Schultz, also showed that the brand was becoming somewhat-desperate to find senior-level leaders equipped with the ability to change process, promotion and other marketing functions to re-invigorate the brand at the global level. A shift of senior-level leadership shows one effort by Starbucks to renew the brand at the organisational and strategy level. Additionally, Starbucks has considered launching unbranded stores in the U.S., offering similar coffee and tea products under the name 15th Avenue Coffee and Tea (Golding, 2009). This effort also includes unbranded store models which offer alcohol under license (Golding). The goal of this effort is to provide more beverage options and flexibility by appealing to the alcohol-consuming patron. Additionally, the leaders of Starbucks believe that these “unbranded stores can sharpen the core brand” (Golding, 2009, p.16). The consumption of alcohol at Starbucks-owned coffee houses poses considerable risks at the strategy and liability levels, however the potential benefits of this effort to re-invigorate the brand shows that it is targeting a wholly-new market group to diversify its current clientele. Says Howard Schultz, Starbucks’ current CEO, “There is no victory lap going on at Starbucks…we realise how tough the environment is in terms of the economy” (Birchall, 2009, p.12). At least at the senior level, Starbucks recognises that it must redevelop many parts of its business model in order to remain competitive. With sales declining due to economic woes at the consumer level, the business has been forced to re-examine its expansion history and slow the process of new store development at the global level. Over-expansion, creating too high of an operational expense for the brand, is the largest contributor to the business’ sudden need, after 2007, to cut costs in multiple business areas. This is most noticeable with the closing of stores across the world. Says one consultant from Pi Global, “Starbucks must seriously and rapidly evaluate what the brand stands for, what it sells, and what the consumer experience should be” (Birchall, 2008, p.10). However, when international facility operations costs are too high to be supported by the ratio of same-store visitors, the company has been forced to, first, reduce costs in order to ensure enough profitability to focus on its core businesses rather than expanding further across the world. In Australia, as one example, Starbucks has closed 61 of its 84 stores (Allison and Smith, 2008). To the firm’s advantage, they are aware of which markets are underperforming and are able to make strategic decisions, in the right market environments, which can best enhance their operational profit. At the same time, 13,000 employees have been displaced by store closures (Michaels, 2007), representing further reductions to payroll obligations to improve total business profit. Another effort to re-invigorate the brand after its problems in 2007 was the development of a loyalty programme which offers discounts to frequent customers (Allison, 2008). Most luxury brands believe that loyalty programmes cheapen the brand and give consumers non-luxury perceptions. “Discounting is a dirty word in the luxury sector” (O’Connor, 2008, p.1). However, in order to build higher same store sales, these loyalty programmes were necessary to renew consumer interest and add a new value to the process of consuming Starbucks products. Even though the company absolutely does not want to cheapen its brand by offering ongoing discounts, these loyalty programmes are short-term strategies to improve sales performance store to store. It would seem that the focus to offer discounts and loyalty programmes such as this, at a time when disposable consumer incomes are down, is a necessity for Starbucks since lowering the prices on many of its menu products could erode brand image and reputation. Starbucks has also been using, since 2007, new tactics for creating positive relationships with investors, who have witnessed measurable drops in share value. Previously, investors applauded the expansion efforts of Starbucks and had received considerable benefits by investing in the company’s stock. However, investors, by 2007, had become concerned that too much expansion was cannibalising existing store sales, essentially causing the company to compete with itself simply by having too many stores (Adamy, 2007), The company uses promotional press releases showing their cost-cutting efforts and their slowing/ceasing of new store development as a means to invite more investor confidence to make their shares more valuable. At the strategic and marketing level, these efforts work to reinvigorate the brand at the investor level. The importance of promotion for Starbucks The company has also reconsidered which portions of the marketing mix required the most focus for redevelopment in order to re-invigorate the Starbucks brand. At the promotional level, Starbucks had always avoided costly television advertisements as part of their strategy for cost-savings and for trusted reliance in their non-broadcast promotional efforts. However, to renew the brand, the business has opted for the use of television advertising, in key markets, to build more brand loyalty or brand awareness in developing countries. CEO Schultz believes this to be a “natural evolution of the maturity of the brand and the experience” (Birchall, 2007, p.15). Even though this can be a costly and high-time-investment activity, television advertising is a new promotional strategy to strengthen Starbucks in multiple international environments. Promotion as a means of reinvigorating the brand is one of the main strategies and can also be observed in several attempts to use product placement in television movies. Two movies with different demographic consumer targets were heavily promoted for Starbucks product placement as a means to give the brand more exposure. However, despite the high financial investment and concentrated promotion, both films scored exceptionally bad at the box office and Starbucks did not receive the return on investment they had anticipated (Buchanan and Simmons). Even though this was an attempt to strengthen the brand in a new promotional medium, its failure should be recognised. The movies selected for product placement were not catering to mass markets and both carried themes which were very niche-oriented. Better research conducted into what types of movies are most synonymous with its target consumers would provide better product placement which actually gives the return on investment anticipated. This was a failure at the marketing level, however it does show innovation for Starbucks to reassess its marketing mix and refocus its efforts on promotion as a means to renew the brand as a luxury player. Conclusion Marketing luxury brands, such as Starbucks, during an economic period where consumer behaviours and incomes are changing is extremely difficult for strategists. Starbucks most definitely expanded too quickly without taking into consideration the life cycle of the brand and its many beverage/food products. Though the business is still strong in 2009, it clearly is not experiencing the same type of sales growth it once relied upon and could count on from luxury and quality-minded consumers. Added to this the growth of non-luxury brands positioning themselves as luxury products, companies like Starbucks have competitive difficulties when trying to renew and strengthen a failing brand. Starbucks must continue to close its stores which are not performing to expectations in order to reduce operational and marketing costs. 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